LLC Guide

Limited Liability Companies (LLCs) are popular among small business owners for their strong liability protection and flexibility. Get an LLC for $100 + state fees (includes a year of registered agent service and domain name registration) or use our guide to do it yourself.

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What Is an LLC?

A Limited Liability Company (LLC) is a type of business entity that protects its owners from being held personally responsible for paying business debts. An LLC has its own distinct legal existence, separate from its owners. This means that if an LLC can’t pay a debt, its owners aren’t usually required to dip into their personal assets to pay it. Without officially forming a business entity like an LLC, your business debts are your debts, and you’re personally responsible for paying them. This protection is called limited liability, and it’s the main perk of starting an LLC. But it’s not the only one.

LLCs are also popular among small business owners for their flexibility. Unlike corporations, which offer limited liability but are subject to a rigid structure, LLCs are open-ended in how they can be managed, taxed, and owned. You can hire a manager to run your LLC or do it yourself. You can have multiple owners or just one. And you can choose how your LLC is taxed. Read on to discover if an LLC is the right entity for your business.

Learn about the LLC rules and registration requirements where you are:

How Do You Start an LLC?

In general, it takes at least four steps to start an LLC:

  1. Name your LLC. This step is a bit more involved than it sounds, as each state has its own rules for what you can and can’t name an LLC. Plus, once you have a business name that fits your state’s requirements, you’ll need to make sure it’s available as a domain name, too.
  2. Choose a registered agent. This is someone designated to receive legal notifications on behalf of your LLC. You’ll need their information handy before you can fill out your paperwork.
  3. File Articles of Organization/Certificate of Formation. The paperwork is a little different for every state, as are the filing fees.
  4. File your Beneficial Ownership Information Report. This is a federal filing that discloses ownership information to the federal government.

What Are the Tax Benefits of an LLC?

The main tax benefit of an LLC is flexibility. When you start an LLC, you have taxation options.

There’s no IRS tax designation especially for LLCs—instead, a single-member LLC is taxed as a disregarded entity and a multi-member LLC is taxed as a partnership. However, an LLC can file paperwork with the IRS to be taxed as an S-Corp or C-Corp. So, what does that mean?

Pass-Through Taxation

Basically, the LLC’s profits and losses pass through to the owners, who report them on their personal tax returns. The LLC itself doesn’t have to file income taxes.

Self-Employment Taxes

The IRS considers each member (owner) of the LLC to be self-employed. Self-employed business owners have to pay self-employment taxes on all the LLC’s income—even the money that’s reinvested in the business. Self-employment taxes encompass both social security and  Medicare, and sit at 15.3%.

S-Corp Tax Election for LLCs

LLCs can also file paperwork to be taxed as an S-Corporation. An S-Corp is not a business entity or structure. It’s a tax classification available to eligible businesses that combines some features of C-Corporation and pass-through taxation.

Pass-through taxation: Like partnerships, S-Corps don’t pay a federal corporate income tax—profits pass through to owners, who report income on their personal tax returns.

Distributions: Unlike partnerships, S-Corps can pay dividends to owners that aren’t subject self-employment taxes (as long as the owners are paying a reasonable wage to anyone working for the business).

C-Corp Tax Election for LLCs

The C-Corporation tax election is less common among LLCs, but not unheard of. C-Corps pay the corporate income tax rate on profits. Shareholders also pay taxes on their personal tax return for any profits they receive. But unlike in a default LLC or S-Corp, any profits that the C-Corp reinvests into the business aren’t subject to personal income taxes. C-Corps also have access to more tax deductions than other tax classifications.

How Is LLC Ownership Divided?

An LLC’s owners are called members. In most states, there’s no limit to how many members your LLC can have.

Ownership in an LLC is called “membership interest.”

Membership interest can be divided up however you’d like—this is one of the perks of starting an LLC. Typically, membership interest is divided among members based on their initial contributions—how much money they invested at the start of the LLC.

For example, say an LLC has ten members, and they each contribute $1,000 to the LLC for a total of $10,000. Each member would hold 10% membership interest. However, this is just one way to set up membership interest. In your operating agreement, you can specify any arrangement you like.

Typically, membership interest is directly correlated to voting power, so the members with a higher percentage of membership interest hold more decision-making power. But this too can be defined differently in an operating agreement.

LLC Management

Another benefit to starting an LLC is the flexibility in management structure. While corporations are subject to a strict management structure. LLCs are adaptable.

What is a member-managed LLC?

A member-managed LLC is an LLC managed by its members. This means that the members themselves are the ones who make day-to-day decisions about the business together. Where will you set up shop? Register your domain name? Open a bank account? In a member-managed LLC, the business owners make all of the decisions together. Most small LLCs that aren’t ready to hire employees are member-managed.

What is a manager-managed LLC?

In a manager-managed LLC, a hired manager does the work of running the business. Management can be made up of members, outside individuals, other LLCs, corporations, or all of the above—but usually, managers are hired employees who work for a salary, and they hold some decision-making in the LLC.

Member-managed LLCs are common among larger LLCs where it’s not practical for all the members to be involved in day-to-day decisions.

How Our LLC Formation Service Works

  1. Head to the Business Formation Sign Up Form. It will take you through a series of questions required to start your LLC.
  2. Add on free branding tools. When you hire us to start your LLC, you get a free domain name for a year, plus 90-day free trials of a pre-built business website, phone number, professional email, and SSL security.
  3. Pay our fee ($100) plus the state’s filing fees. This price includes a year of registered agent service (a $200 value). We’ll file your LLC and send you confirmation when it’s official.

LLC FAQs

Can you have an LLC with just one member?

Yes! An LLC with just one member is called a single-member LLC or SMLLC. Single-member LLCs are very common.

How do owners pay themselves from an LLC?

If you have a single-member LLC, you’ll make something called an “owner’s draw.” This is basically just taking money from your business bank account. This can be done by writing a check to yourself, withdrawing cash, or just transferring the money from one bank to another. The key is to make sure that there’s a financial record of the money’s journey. For example, you shouldn’t take a payment from a customer and deposit it directly into your personal bank account. This could weaken your limited liability protections.

If you have a multi-member LLC, you can use owners draws or make distributions to members. Typically, an LLC will distribute money once yearly to members.

Why does my LLC need a bank account?

Your LLC’s liability protection is only as strong as the separation between you (the owner) and the business. So if you let your personal finances mingle with your business money, you’ll effectively erode that separation. There may be no immediate consequences to the erosion, but if you’re ever sued, a court could find that you and your LLC aren’t actually separate entities, leaving you liable for any judgments against your LLC.

There’s also the fact that a separate bank account will help you stay organized and aware of how much income your business is bringing in.

Does an LLC have to file a BOI Report?

Yes, most LLCs are considered “reporting companies” under the Corporate Transparency Act and need to file a BOI Report with FinCEN. There are 23 exemptions, but most of these exemptions are for large companies that are already subject to a lot of regulatory oversight. Most LLCs do not fall into this category and are required to file a BOI Report. We can take care of this requirement for you for $25.

What happens if you start an LLC but don’t do anything with it?

It depends on your state. When you start an LLC, you’re required to file regular reports keeping the state up-to-date on your LLC’s contact information. If you fail to do this, the state may administratively dissolve your LLC for you, but they may not. If you let your LLC go dormant and then decide you’d like to use it later, you’ll probably have to pay penalties and fees for late annual reports to get your LLC back into good standing.

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